How Bitcoin can contribute to a resilient community

I normally write about technical subjects on this blog, but for this article I’m going off this well-beaten path and into the realms of Bitcoin and resilient communities. I’m doing this because I’d like to step up to the challenge offered by John Michael Greer in his recent Archdruid Report “A Wishlist for Krampus”.

In the article, which has little to do with Druidism and much more to do with attempting to prepare people for a world with reduced access to natural resources, JMG asks his readers to come up with solutions to problems that are likely to cause hardship in the coming years. To answer this, I’m going to make the case that Bitcoin, my favourite cryptocurrency, can contribute to a resilient community.

Since this is a technical blog, I’ll go heavy on the technical impacts of resource scarcity and a detailed description of Bitcoin itself, however the reader is directed to Tainter’s Collapse of Complex Societies for an interesting historical perspective.

My approach to this will be to first lay out why resource scarcity will be a problem, then why resilient communities will be needed and finally how Bitcoin can contribute. In order to answer that final part I’m going to have to first work through some background material which is going to take some time since there is a lot of material. So without further ado let’s get started.

Oil shortage is not the problem, burning it is

I imagine that many people are aware that oil is being used up, and that various technological innovations are taking place to keep it flowing. The mandate appears to be to find more oil before it runs out and we’re left stranded (and the rate at which we can extract it is not meeting demand). Let’s be clear from the outset - we’re not going to run out of oil any time soon. The lack of oil is not the problem here, but rather the impact of actually burning it. This also holds true for natural gas and coal, but I’ll stick with oil for the remainder of the discussion.

An average global temperature increase of 2 degrees Celsius is enough to cause significant areas of our planet to become uninhabitable (basically anywhere close to the equator) and this outcome should be avoided at all costs. This is the view taken by almost all countries in the recent Copenhagen summit.

In terms of carbon dioxide (CO2) input it takes approximately 565 gigatons to cause a global increase in temperature of 2 degrees Celsius (3.6F). In 2011 the global population introduced 31.6 gigatons into the atmosphere. Simple mathematics leads to a prediction of a 2 degrees temperature rise in under 20 years all things being equal.

In addition, if we burn only the oil from fields that are currently accessible to us (i.e. no new sources of oil like shale oil or tar sands) we will introduce approximately 2,795 gigatons of carbon into the atmosphere. Over 5 times as much as we could reasonably tolerate. Recent discoveries of shale gas do nothing to offset this because we are not addressing a shortage, but rather the consequences of using the plentiful supply we already have. So we need to stop looking for more oil/gas/coal and instead use what we currently have to wean ourselves off it and on to some viable alternative of equal or greater magnitude.

Now, I’m a technical guy. I solve difficult technical problems for a living. I’m not about to lie down and just assume that no alternative exists. Unfortunately, all my research into alternatives (well summarised in the Without Hot Air articles) has lead me to conclude that the only viable source of national grid scale energy we have available to us within 20 years is nuclear power. Even then it’s going to be more of the uranium than the thorium since it takes a lot of time and research to get a new nuclear technology to meet stringent safety standards.

Of course, we could just keep on doing what we’ve always done. Burn the oil and the new shale reserves and care little about the consequences. Unfortunately, those consequences mean that crops won’t grow in places that we rely on them to grow in. Food shortages mean serious social and economic unrest (read riots and refugees). We will accelerate the change and deepen its effects and in the end arrive where we should have been a lot earlier but with a lot less to work with.

So let’s assume that we do the right thing and cut back heavily on carbon producing technologies and focus on low-carbon alternatives, and reduced use of energy overall. We reduce our consumption of oil-based products (transportation fuel, commodity plastic, intensive farming and so on) and switch to a lower-carbon electrical future.

It would be easy at this point to draw the conclusion that I’m suggesting ditching all our existing technology and reverting back to some utopian dream of medieval life. That’s not likely to happen.

Energy efficiency is everything

In brief (since there are a lot of articles out there that already describe this) we are talking about how to manage the transition from one energy source (oil) to another (electricity) using our existing infrastructure. Where before we used oil directly we will now need to use electricity, and do so efficiently because it will be expensive.

Heating and cooling our well-insulated homes will require heat pumps, with immersion heaters to provide hot water. People will begin to favour wearing an extra layer in winter instead of turning up the thermostat. Travel will be constrained by the range of electric vehicles. However this range will probably be effectively infinite since a supply of standardised pre-charged slot-in-out batteries available at regular intervals along the journey is a matter of converting existing fuel stations. How we manufacture these batteries is another matter...

As energy scarcity becomes real people will choose to burn oil/gas/coal to keep warm rather than using it for travel. An efficient Eberspacher diesel heater use 0.25 litres per hour and can keep you warm. That drives you 5km in a small, efficient Toyota. If you can either heat your house for a day, or drive to the mall, you’ll heat your house.

The rise of resilient communities

A resilient community is one which is efficient, sustainable, modern, connected and localised with the ability to survive a wide range of challenges. There are many viewpoints to use when studying a resilient community (social, economic, technological, agricultural and so on) but I will concentrate on the technological and economic for the remainder of this article.

To be resilient from a technological point of view it is necessary to have multiple redundant systems that are secure against attack and provide services in a timely fashion with easy accessibility. This translates to ensuring that the key technologies of water, power and communications are always available.

Water is largely covered by having each home possess a high quality water filter and a rainwater collection system. In extremis residents will be able to use this as a short term source of potable water. People in cities or apartment blocks should look to keeping a small stash of water somewhere in their dwelling just in case. There are many articles on the internet that deal with how to store emergency drinking water.

Power is quick and easy to generate at small scales, not so easy at national scales. A resilient community would expect their residents to invest early on in simple power generation solutions like solar powered mobile device chargers or more complex solutions like uninterruptible power supplies or manual power generators. At a community level the idea of DC grids and localised power generation would further reduce the reliance on a national grid system. If all else fails people will always be able to generate power somehow, even if it means sitting on a bike attached to a generator and pedalling like mad for an hour.

Communications are more tricky to get right and this is the area I want to focus on. People will come to rely more and more on the Internet since it will provide many ways of introducing energy efficiency. Rather than hop in the electric car and zoom off to a meeting 200 miles away, we’re much more likely to just start a Google Hangout.

Supermarkets will improve on home delivery/local pickup since they will want to save on storage and marketing costs associated with stocking shelves for the public. We’ll move further towards to an Amazon model of grocery shopping which at a community level can be made extremely energy efficient, and is able to take advantage of local produce.

People will therefore expect to have high speed access to the Internet everywhere which will give rise to a plethora of low power consumption mesh networks. This effect is already in place in Africa where much of the continent’s communications infrastructure is wireless having leapfrogged the expensive trench digging associated with burying copper.

It may be that network providers will rely on local businesses to provide and manage access points to reduce their maintenance costs. Out in the countryside small wireless repeaters can be provided in weatherproof boxes with a small solar panel. This could have the effect of removing the need for ugly cell phone towers that come with a large electricity bill. It will also introduce the need for an efficient method of Pay As You Use services and this could provide a much needed additional income for businesses and farms alike.

Resilient economies

From an economic viewpoint a community is resilient if it can continue to help build and maintain wealth for its population independently of external risks. This starts with asset ownership (such as owning some land that is recognised as such by the local government) and extends to making use of that asset to build small enterprises and scaling up to larger market-connected enterprises. All of this can be built with sustainability and energy efficiency in mind - it is likely that the market would demand it.

When things go bad: hyperinflation

However, there is a systemic risk that underlies all economic activity: the value of the currency used to conduct trade. A truly resilient community must address the inherent risk associated with the ever present danger of hyperinflation. This is not to be confused with normal inflation which has both positive (encourages investment by savers) and negative (gradual erosion of wealth) effects.

Hyperinflation, generally defined as a sustained monthly inflation rate of greater than 50% for over a year, occurs during times of great social upheaval and generally wipes out the value of intangible (or paper) assets during that time. There are many stories and articles that describe the effects of hyperinflation so I won’t detail them here, but suffice to say that the only defence against hyperinflation is to get rid of all assets that are grounded in the affected currency as quickly as possible. Typical examples would be savings, loans, pensions and so on.

This is a problem since converting one’s saving account with the bank directly to cash is going to rapidly cause a run on the bank. Most banks do not operate with 100% cash reserves so converting all accounts to cash will soon stop being possible as the bank becomes insolvent. On top of this, once hyperinflation sets in those colourful pieces of paper representing your wealth will be eroding in value extremely quickly. Of course if you owe anything to anyone in a period of hyperinflation it generally becomes very easy wipe out the debt if they still accept the currency.

This leaves the problem of where else to store one’s wealth? Typically the answer to this is to obtain physical gold and silver and hide it somewhere safe. Naturally this has the effect of rapidly driving up the price of gold and silver, and the availability of it in the immediate vicinity might not even be possible. Also day to day spending is still required and so people often turn to more stable foreign currencies to assist them with obtaining groceries and suchlike. Unfortunately, this exposes people to currency conversion fraud as a variant of Gresham’s Law takes effect. As the “good” foreign money is hoarded and the “bad” local money is disposed of, the exchange rate reflects the “bad” to drive further hyperinflation.

A close look at money

Let’s us take a hard look at what money is to ensure that we don’t get any “cold prickly” feelings about it later on. Put simply, money is simply something that can be used to trade something for something else. More formally:

“Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.”
Wikipedia

There is nothing that is inherently money, nor is there any agreement signed to declare something as money. Money simply arises as the most efficient mechanism of barter.

An experiment

Here’s an experiment. Reach into your wallet or purse and pull out a paper bill or note. What you are looking at is surely money. It has value. It was hard enough to earn. Absolutely - but only as long as someone is prepared to accept it. Once people stop accepting it then it will revert back to what it is: a coloured piece of paper.

Fortunately those bills are guaranteed to be accepted by their issuing government since they are considered legal tender. No matter what, the issuing government will accept them as payment for debts incurred. This ensures that those bills have value because debts to government come in the form of fines and taxes - one of which is certain. Anyone in a situation where they must pay off a debt to the government must use those bills or face punishment. One could say, then, that those bills have value by decree of their issuing government. Another way of stating that is to call them fiat money.

A little monetary theory

Since the government owns the currency it has total control over it. A responsible government will keep an eye on the economy and make changes to the money supply if things start to drift away from the acceptable status quo. For example, if interest rates are getting too high (indicating scarcity of investment money) then it will purchase government bonds which has the effect of raising their prices. This in turn causes the interest rates to fall because more money has been injected into the supply and must be invested leading to competition driving prices down. Later on when interest rates are getting too low, the government does the reverse and introduces scarcity thus raising interest rates. This works so long as people are willing to buy the government bonds.

In extreme situations the government may turn to a process called quantitative easing (QE). Essentially this source of “easy” money enables the government to purchase assets from the banks who in turn are expected to loan it out so that people and businesses can make capital purchases thus stimulating economic growth. The downside of this easy money is that it dilutes the currency leading to greater inflation.

A less responsible government could use these tools to indiscriminately create large amounts of their currency without regard to the inflationary impact it will have on the economy. This massive injection of money at first means that the government can pay off its debts in its own currency by inflating those debts to something more manageable. Unfortunately, the side effect is usually rampant inflation rapidly turning into hyperinflation so that the $100M debt becomes less than the price of a cup of coffee.

So having covered a substantial amount of monetary theory, what is the resilient community to do to mitigate this risk? The choices typically come down to using gold and silver or somehow inventing their own currency.

The case against gold and silver in the resilient community

Gold and silver have long been the principal commodities used as money. Among their virtues are that the supply of precious metals is limited, they are durable (unlike fine art or wine), divisible to a certain degree (so work well for coinage) and can act as a reliable investment of last resort for wealth preservation.

However, keeping a substantial reserve of a valuable physical commodity has its drawbacks. Security of storage normally implies leaving it with a bank, and governments have been known in times of national crisis to seize the gold assets of private citizens in order to increase their gold reserve and prop up their currency. This is usually done with a significant markdown on the asset price.

There is also the problem of day to day transactions. Gold and silver coins are limited to relatively high value purchases made in person (due to the high value of their metal), whereas paper cash and payment cards can manage a much wider range. In fairness, it is possible to create a paper note system that is backed by gold and that has a digital asset management structure in place but there is always the problem of trust in the issuer.

All of this manufacture requires a lot of physical effort. Gold and silver coins are expensive to mint and relatively easy to counterfeit once you have the base metal. The paper bills must be created out of materials that are physically controlled to prevent counterfeiters from creating their own. Transporting and protecting the coins at close of business also requires considerable physical security including guards and vans. As transaction volumes increase so does the need for more physical security. None of this could be considered energy efficient.

Perhaps the most important point, though, is that people expect to be able to use their currency online with minimal effort. This means that it has to dovetail neatly with the conditions that are present on the Internet, and it is for this reason that research began into digital currencies.

Creating an ideal digital currency

Creating a digital currency is not a trivial task. There are many factors that need to be taken into account in order to make it have many of the characteristics of physical cash. In summary, an ideal digital currency would be:

decentralised (no single point of failure or issuing authority to trust)

scarce (required to be a reasonable store of value)

divisible (for a wide range of possible transaction values)

storage (commodity hardware should be sufficient)

irreversible (once paid you cannot be unpaid)

anonymous (your identity is not required make or receive payment)

forgery proof (it should be extremely hard to counterfeit)

gratis transactions (cost of a transaction should be zero or extremely low forever)

offline transactions (transactions should be possible outside of a network)

fast (transactions should complete within seconds)

scalable (the system should work globally)

stable (the future value should be predictable within reasonable bounds)

Up until 3 January 2009 18:15:05 GMT there was no system in place that could adequately meet all of the above characteristics. At that moment, however, the genesis block of Bitcoin was discovered and a new digital currency for the Internet was established. Readers may be interested to learn of more milestones in the history of this fascinating digital currency, or explore the original whitepaper put forward by its pseudonymouns creator Satoshi Nakamoto.

Zero trust required

It is now possible for a anyone to conduct digital transactions with anyone else, anywhere in the world simply by downloading free and open source software. You don’t have to trust anyone or register with anyone to use it. There are no age, gender, language or culture restrictions. The source code is there for anyone to review and contribute to (subject to code review). The clients are all available with multiple languages including English, Spanish, Chinese, Russian, Greek, Arabic and so on. Bitcoin is a truly global internet currency.

A glossary of Bitcoin jargon

Here are some terms that get used a lot in the Bitcoin community.

Bitcoin - the digital cash protocol (has a capital B)

bitcoin - a unit within Bitcoin (has a small b), can be divided up into smaller parts (0.000 000 01 is the smallest part at present)

Bitcoin address - tells someone where to send their bitcoins to pay for something (like an email address for money) - here’s an example: 1KzTSfqjF2iKCduwz59nv2uqh1W2JsTxZH

wallet - a small data file that provides the keys to your bitcoins (keep it secret, keep it safe)

Bitcoin client - a computer program that understands how to work with bitcoins

QR code - a square block of dots that computers and smartphones can scan like a barcode to read information.

transaction - occurs when bitcoins change hands (a transaction is not reversible so no chargebacks are possible)

block - a group of transactions

blockchain - a group of blocks (it represents all the transactions that have ever occurred within Bitcoin)

miner - a computer program that works to build the blockchain and generates more bitcoins along the way (see Bitcoin monetary expansion policy later)

Debunking myths

Naturally, when it comes to introducing an alternative currency people are going to have a lot of concerns about fraud protection and many myths based on false assumptions will arise. Fortunately, Bitcoin itself has withstood the test of time and this is largely because of the technology choices that underpin its operation.

The cryptography that makes Bitcoin secure

Bitcoin uses secure standard encryption algorithms that are in the public domain and have seen active use in many other fields of endeavour (such as in securing international bank transfers and government secrets). For the technically minded these are SHA-256 and RIPEMD-160 for providing hashes, and Elliptic Curve DSA on the curve secp256k1 for transaction signatures. There is nothing hidden or special about the code that Bitcoin uses, it is all out in the open for anyone, anywhere to review and work with.

Private keys

What does remain secret are the special keys (called private keys) that provide access to your bitcoins. These keys are kept in the wallet that can be shared across devices. They are what you use to sign your transactions. If you lose them then nobody can recover them for you. Your bitcoins are gone. If it were otherwise then Bitcoin would not be secure. However, suffering a smartphone or hard drive failure is usually something that can be recovered from.

Fortunately, it is trivial to protect your private keys. Since they are merely numbers, you can be as ingenious as you like in protecting them. You can even write them down on paper and hide that paper in a safety deposit box if you choose. Contrast hiding private keys that access $1M worth of bitcoins with the effort required to protect the equivalent amount of gold coins.

It should also be noted that the computer that works on signing transactions does not ever have to be connected to the Internet so that private keys can be generated on a completely clean machine.

No dependence on continuous electricity or network

Private keys can be traded to the value of the balance that they can access. Whoever owns the private key controls the funds and there is no registry of who owns which private key. This means that Bitcoin can operate in areas where electricity and network connectivity are limited.

One approach is to use physical bitcoins such as Casascius coins which protect the private key from tampering and provide an easy way to verify the face value of the coin is still valid. Since the private key is physically attached to the coin the recipient can be confident that the payer no longer has it. This makes it easy to use Bitcoin in areas without electricity or with a need for instantaneous anonymous transactions.

How more bitcoins are added

Technical details aside, perhaps the most important aspect of Bitcoin is the way in which new bitcoins are added. After all, the avoidance of manipulation of the money supply is the main reason why Bitcoin provides a better option than fiat money in the first place.

To be clear, the only way new bitcoins can be added to the system is through solving an extremely complex mathematical puzzle. The Bitcoin network works to ensure that this puzzle can be solved in about 10 minutes, and the solution depends on all the previous transactions that went before it.

For the technically minded it is about finding a SHA-256 hash with a particular number of leading zeroes based on the current set of new transactions offered by the network since the last solved block. Every four years the number of bitcoins released into the system by this process is halved. In December 2012, the reward for solving the puzzle dropped from 50 bitcoins to 25. In another four years it will drop again to 12.5 then 6.25 and so on.

As more computers grind away at solving the puzzle, the solutions begin to come faster so the Bitcoin network reacts by raising the difficulty. The difficulty is over a million times harder today than it was 4 years at the genesis block. According to BitcoinWatch.com the network hashrate is in excess of 285 PetaFLOPS making it by several orders of magnitude the most powerful computing network in the world. This makes the network very secure because it would take another malicious network of computers of near equal size to reverse or override any transactions and maintain the lie.

Fixed monetary expansion policy

Astute readers will have realised that this method of adding bitcoins means that Bitcoin has a fixed monetary expansion policy which is predictable until the last bitcoin is discovered. This leads inevitably to a fixed maximum number of bitcoins that can ever exist. This works out as 21 million bitcoins, each divisible to 8 decimal places leading to 2.1 quadrillion individual units for use in transactions. That should be more than enough to run a global economy, but more decimal places can be added if necessary.

So given that it is known in advance how many bitcoins will be generated, and at what rate, it is easy to conclude that Bitcoin is a deflationary currency. This means that over time its value increases. This is the exact opposite of inflationary currencies which are universally fiat currencies. Whereas in dollars, pounds or Euro your buying power decreases over time, with Bitcoin your buying power increases. Many people believe that this leads to hoarding, and thus makes Bitcoin non-viable, but there is a simple demonstration of why this is false.

If I offered you an iPad2 today or an iPad3 in six months would you wait? It would depend on your need. You know that the iPad3 is going to be technically superior to the iPad2, but you might want to take advantage of the extra productivity that the iPad2 gives you right now. That extra productivity is more valuable than holding on for six months and then playing catch up. It’s the same with Bitcoin. You spend money today to get something that will make your life better. Also, you have no guarantee that your bitcoins will be worth substantially more in six months than they are today.

How Bitcoin helps a resilient community

And now we come to the point of this article: how Bitcoin can contribute to a resilient community. By its nature Bitcoin ensures that a community adopting it will be more resilient to events leading to financial upheaval than one that has not. However, resilient communities must be able to function in the normal world of the here and now and Bitcoin assists with that because it is quite possibly the most efficient form of money there has ever been.

Efficient trade with no middleman taking fees

To see this efficiency in action let us invent a resilient community, based in rural Africa, that has a special tradable product (decorative necklaces) which it wishes to sell direct on the Internet. This community does not have easy access to a trustworthy bank but they do have smartphones with wireless Internet access and solar rechargers and Bitcoin software loaded. By posting up their product description and a Bitcoin address to a suitable website this community can now take orders for their product.

There is no middleman to take a hefty transaction processing fee or to block them from accepting the order on, say, political grounds. Also, once the bitcoins are signed over then the transaction is irreversible so there is no danger of punitive chargebacks in six month's time. The business owner merely has to check their smartphone to see the bitcoins come in and fulfil on their promise to ship the product using an address on the order email.

Easy escrow

Of course, anyone purchasing from a distant trading partner would first be cautious about their ability to deliver and so Bitcoin encourages the use of escrow transactions. This is when a buyer and seller do not trust each other so rely on a (usually automated) trusted third-party to hold on to the payment while the goods are shipped. The seller can see that the bitcoins have been paid, the buyer releases the funds when the goods arrive and are accepted. If something goes wrong then the escrow company follows a set of rules to determine who gets the bitcoins, but they themselves cannot sign the bitcoins over to anyone else other than the original buyer and seller.

Efficient donations

Imagine that this African community was in dire need of agricultural equipment and you knew and trusted someone in the village to spend any donated money wisely. The process of sending much needed funds to an African village is currently fraught with hazard and expense, but with Bitcoin it is trivial. Your friend need only send an email with their Bitcoin address and in 30 seconds can see your donation on their smartphone. Your friend can then purchase the items they need and the local economy is able to grow at a substantially accelerated rate.

Global micro-loans

Setting up a global Bitcoin micro-loan service would be much easier than through traditional means. Bitcoin does not discriminate on transaction value, so sending $10 worth of bitcoins to a rural outpost is as easy as sending $1000. This gives rise to the potential for micro-loans with fixed payment fees to be set up. For example, I could send $100 to a village in Bolivia to help a group of women business owners expand. I could charge a fixed fee of $5 for this loan, payable in full in six months. The money transmission costs are near zero, there is no middleman to take a cut and the business owners are not burdened with punitive compound interest.

Pay As You Use mesh networks

Earlier in the article I mentioned the possibility of farmers running solar-powered network repeaters. It so happens that Bitcoin developers have explored a proof of concept that allows for an ad hoc network to be created and rented out on a pay as you use basis.

The prototype demonstrates a Bitcoin transaction making several hops across participating smartphones that had no Internet connectivity, but were able to share a near field communication (NFC) or WiFi hotspot which included other smartphones. Eventually one of the smartphones was in reach of an Internet connection and relayed the transaction to the wider network. Since each of the other smartphones was assisting the originator in getting to the Internet they received a small payment to cover the cost of relaying the transaction. This payment was fractions of a penny, but Bitcoin supports payments this small economically.

This ad-hoc mesh network is completely outside the control of central authorities and so acts as a resilient solution to social unrest causing problems with communications. Bitcoin transactions have even been made over DASH7 sensor networks and over the Ham Radio PSK31 digital mode.

Enabling peer to peer over centralisation

Bitcoin strongly encourages resiliency through the use of distribution of work. This could have a profound effect on the nature of business entities in a resilient community. Instead of the traditional centralised company, an alternative distributed form could take its place. Some of this is already happening as online education through Massive Open Online Courses (MOOCs) takes over from traditional academic institutions.

People can now turn away from traditional career paths and instead offer themselves up for feelance operations with ad hoc teams spanning the world. Payment for which could be efficiently managed through the common use of Bitcoin. This promotes an energy efficient allocation of specialist knowledge which is already seen in voluntary organisations like Random Hack of Kindness on a regular basis.

Conclusion

Throughout this article we have seen the inevitability of the need for resilient communities, and the liberating power of Bitcoin. Thanks for taking the time to read (or even skim) this article and maybe you might consider taking Bitcoin for a spin. Personally, I would recommend the MultiBit client since it works everywhere and is very fast to get started. Also, I did some work on it so I know it’s good.

Many people find purchasing their first bitcoins somewhat daunting depending on where in the world they are. You can use How Do You Buy Bitcoins to provide you with a comprehensive and regularly updated set of instructions for your country and payment type. A note to the wise, though, don’t try to buy bitcoins with PayPal or a credit card - it is against their terms and conditions and the risk of a chargeback makes this extremely unlikely to happen.